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October 21, 2010

Market jitters shake stock index futures bulls and bears

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October 21st, 2010

It is difficult to determine which party is more nervous, the bulls or the bears. Each time the market runs to the highs, the bears panic and cover and the opposite happens near the lows. It's clear that traders and investors alike are uncertain as to where to go from here.

It is becoming glaringly obvious that stock index futures traders have essentially become currency traders. We have been looking for the bottom in the Dollar for several reasons. For one, the primary counter currency (Euro) isn't backed by impressive fundamentals and recent downgrades of Spanish debt in late September is a sure sign of troubled waters. Also, the markets have been pricing in the next round QE2 for months now and even if the Fed does come through, it might not have much of an incremental impact on currency trade. In fact, some argue that QE2 could actually be bullish for the greenback! A dollar recovery will take some of the fluff out of stock and commodity prices and that is just what we need to trigger a healthy correction in equities.

Similarly, some analysts claim that $600 billion in QE2 equates to a 6 to 8% increase in equity pricing...and the S&P 500 futures have done that and more. In other words, the Fed has accomplished its goal without even lifting a finger. Unfortunately, they have come too far to back out now; failing to meet the market's expectations could prove to be disaster.

We aren't advocating getting overly bearish, that viewpoint hasn't been successful in months and long-term stocks are still attractive. However, moderate and hedged bearish positions established on rallies to resistance makes sense. Sloppy entry is dangerous!

Coming into today, we were looking for a dip in the dollar to push the S&P futures to 1190. It didn't quite make it, but the 1186.25 print was enough to reverse the rally in its tracks. We would normally look at this as a good sign of a top, after all...the sell stops were taken out yesterday and the buy stops today; this sometimes paves the way for a reversal. However, it isn't as easy this time around given the Fed's scheduled POMO purchases which have been undeniably bullish on operation days. If the market rallies on the Fed's asset purchases look for a good place to be short; mid to high 1180's in the S&P, 716ish in the Russell (a bit of a stretch but possible) and 1209.

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Please note: An e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini. Unless otherwise noted, profit and loss will be based on the mini version.

Futures and Options Trading Recommendations

**There is unlimited risk in naked option selling and futures trading

Position Trade -

October 6 - Clients were advised to sell the November S&P 1215 calls for about $8, fills ranged from $7.50 to $8.00.

Ideas from previous newsletters:

October 14 - We still like the idea of buying lottery ticket puts in November options with strikes near 1100 (about $7). The market seems a bit complacent in the short-term, and this opens the door for a good correction. On the other hand, being overly bearish could be dangerous...so if you are a bear, give yourself room for error and be quick to take winners off the table.

October 18 - The NASDAQ has been a runaway freight-train but good things rarely last forever. We like the idea of trying to play this market from the downside by selling a December futures contract and hedging with a November Bull call spread. For example, the 2100/2160 call spread is going for about $540 and intrinsically insures the short futures position from 2100 through 2160...but leaves it naked (with unlimited risk above 2160) at which point you would want to apply another hedge. The risk to 2160 is limited to the cost of the hedge and the profit potential on the downside is unlimited. For another $400 in risk, you could buy the 2100 outright to eliminate the concern of needing insurance beyond 2160.

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.